The US Office of the Comptroller of the Currency (“OCC”) on August 2, 2017, issued a notice seeking public comment on changes that should be made to the final regulation implementing the Volcker Rule.1 At this stage, the OCC itself is not proposing any specific changes to the final regulation but is instead seeking industry input on potential changes. Notably, the notice is not styled as an advance notice of proposed rulemaking (“ANPR”), which Acting Comptroller Keith Noreika had indicated in earlier public statements that the OCC might seek (and which presumably remains a possibility). The OCC notes in its release that any actual proposal for changes to the regulation must be issued jointly with the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, in coordination with the Securities and Exchange Commission and the Commodity Futures Trading Commission (collectively, the “Agencies”).
The notice seeks specific information that would support revisions to the final regulation, building upon the recent recommendations related to the Volcker Rule in the US Department of the Treasury Report, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions.”2 The OCC is seeking in particular information and data describing burdens or inefficiencies resulting from the current regulation and industry input regarding how particular revisions would alleviate those burdens or inefficiencies. This data could be important in defending changes in the regulation from possible legal challenge. The OCC also requests comment on ways in which the existing regulation could be implemented more effectively without revising the text of the regulation, presumably a reference to the issuance or amendment of additional informal guidance or changes in supervisory or enforcement practices and priorities.
The request for comment addresses four broad aspects of the final regulation, with specific questions related to each.
- Scope of Entities Subject to the Rule
- Proprietary Trading Prohibition
- Covered Funds Prohibition
- Compliance Program and Metrics Reporting Requirements
The notice requests comment on whether the definition of “banking entity” is too broad and, if so, how the definition should be narrowed. In particular, the notice focuses on the broad consensus view that smaller banks typically are not engaged in the kinds of activities that the Volcker Rule was intended to address and therefore should not be subject to the burdens of assessing their activities and implementing a Volcker Rule compliance program. The notice also specifically focuses on whether foreign excluded funds that may be “controlled” by foreign banks should be treated as banking entities, an issue that the banking Agencies recently indicated in joint guidance would be subject to further review during what effectively amounts to a one-year “no-action” period.
The notice focuses on both the definition of “proprietary trading” and the current exclusions and exemptions. It requests comment on possible revisions to the definition and any additional activities that should be permitted as well as comment on how existing exemptions, such as the exemptions for market making and risk mitigating hedging, could be streamlined and simplified.
The notice requests comment on alternative definitions of a covered fund and whether there are additional types of exclusions or exemptions that should be provided. The notice quotes several industry comment letters submitted during the rulemaking process that had noted how statutory reliance on sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 as the primary trigger for covered fund status would result in extensive overreach beyond “hedge funds and private equity funds.”
Finally, the OCC seeks comment on the how the regulation could be modified to reduce the burden associated with the Volcker Rule compliance program and reporting requirements. It also seeks comment on the effectiveness of the quantitative measurements required by the final regulation.
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The comment period for the notice will end on September 21, 2017. Acting Comptroller Noreika’s statement in conjunction with issuance of the notice indicated that the OCC would be seeking to join with the other Agencies “soon” in a Notice of Proposed Rulemaking (“NPR”) to amend the regulation. The Agencies reportedly hope to finish that proposal by the end of the year, potentially an optimistic timeframe given the need to reach a consensus on any proposed changes. Moreover, any proposed amendments to the regulation would be subject to a further comment period before they could be adopted in final form. In sum, while a potentially helpful step forward and an opportunity for the industry to enter into a formal dialogue regarding a regulation so fraught with difficult issues, this is but the first step in what will necessarily be a long journey by the Agencies.